India’s monetary policy committee kept rates unchanged even as it cautioned on elevated risks to inflation. But that doesn't necessarily suggest that the Reserve Bank of India will hike rates anytime soon, economists and money market experts told BloombergQuint.
The policy is “reasonably hawkish”, said S Sivakumar, head of fixed income at Axis Mutual Fund. Given the lag in the transmission of monetary policy, inflation projections of one or two quarters ahead are not really reflective of anything, he added.
It does take away the risk of an RBI hike in the very near term.S Sivakumar, Head-Fixed Income, Axis Mutual Fund
Before RBI embarks on a rate hike cycle, “the first step will be to neutralise liquidity”, said Tanvee Gupta Jain, chief economist at UBS Group said. “It doesn't look like the RBI is in too much of a hurry to increase rates anytime soon”. The MPC today noted that there is surplus liquidity in the system but said it “is moving steadily towards neutrality”. In January, on the whole, the Reserve Bank absorbed Rs 35,300 crore.
The RBI’s tone may have seemed a bit hawkish, but it was just “highlighting risks in the domestic and global markets”, said Shanti Ekambaram, head of consumer banking at Kotak Mahindra Bank Ltd.
The central bank is also concerned about growth, which means they would like to be more sure about the economy before they go ahead “pressing the pedal hard on the rate front”, said Dharmakirti Joshi, chief economist at Crisil Ltd.
The recovery that we are seeing is not mature as yet. It is just the beginning of the cycle.Dharmakirti Joshi, Chief Economist, Crisil
The MPC today said that growth is recovering, as expected, but revised its inflation forecasts higher. Inflation is now expected to head up further to 5.1 percent in the final quarter of 2017-18. In the first half of the financial year, it is expected to be in the 5.1-5.6 percent range and then cool down to 4.5-4.6 percent in the second half, the MPC said.
Here's what brokerages, economists and experts made of the February bi-monthly policy review.
‘MPC Didn't Want To Spook The Market’
Inflation risks in RBI’s view have “skewed firmly to the upside”, but raising rates based on that would “unduly spook markets” which have had a tough couple of months, according to Sajjid Chinoy, chief India economist at JPMorgan.
What the central bank is saying is, given the slack in the economy, now let’s give people the benefit of doubt, if and when the uncertainties get resolved, we will act accordingly.Sajjid Chinoy, Chief India Economist, JPMorgan
A lot of the near-term uncertainties arising out of the Union Budget 2018 will get clarified in the next couple of months, according to him. The kharif season which starts in June will start reflecting the impact of the government’s MSP increase on inflation, Chinoy said. There may also be greater clarity on whether crude oil stays in the $70 a barrel range, he added.
While bond markets are “heaving a sigh of relief”, that doesn't necessarily mean that they will inflect, Chinoy said.
The problem with the bond market is not so much that they were expecting rate hikes soon. The problem is a fundamental one – demand and supply mismatch. At this point, banks are seeing weak deposit growth, they have already bought many more bonds, and they have to see that the RBI, given where the liquidity situation is, will not buy bonds anytime soon.Sajjid Chinoy, Chief India Economist, JPMorgan
He added that the stress in the bond market will be there till this fundamental mismatch doesn't go away.
‘Expect Hold Till Things Go Awry’
The MPC is expected to maintain policy rates “unless things go really awry”, said Abheek Barua, chief economist at HDFC Bank Ltd. The major risks that Barua cited came mainly from the oil market and the domestic fiscal situation which could push inflation “above the expected trajectory”.
The monetary policy was, in our opinion, far less hawkish than expectations.Abheek Barua, Chief Economist, HDFC Bank
There is a near-term possibility that bond yields will decline, Barua said. “However given the pipeline of issuances from the states and the Centre, we think that the rally could be shallow”.
‘More Confident, But More Concerned Too’
The policy statement suggests that the MPC is growing more confident about India’s economic recovery even as inflationary concerns are also on the rise, said Japanese financial major Nomura in an emailed note. The policy was in line with the brokerage's expectations.
For now, with FY19 inflation seen at 4.5 percent, it [RBI] is comfortably on hold. We expect the RBI to leave rates on hold through 2018 because of an ample real rate cushion.Nomura
It added that more clarity is required on the MSP announcement and its impact on inflation and monetary policy. "In Q2, when both growth and inflation are likely to be higher, we expect a slightly more hawkish rhetoric from the RBI, possibly via a change in policy stance."
‘Pragmatic Policy’
The monetary policy statement was "pragmatic and balanced", according to Rajnish Kumar, chairman of India’s largest lender State Bank of India Ltd.
The RBI inflation outlook suggests moderation in second half of FY2019 that will have a positive impact on the bond market.Rajnish Kumar, Chairman, SBI
The relaxation of lending norms for the small and medium enterprises by "broadening the definition of priority sector lending and simplification of repo directions" are all positive steps to move towards a stable macroeconomic environment, Kumar said.
‘Expect A Hike In Next Policy’
Brokerage Emkay Global, however, said the policy statement is a “prelude to a tightening move”. This conviction will fortify once the inflation ranges around 5.5-5.6 percent in the first half of next fiscal, according to Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.
He expects the RBI to hike rates by 25 basis points in the next policy meet.
Improving growth dynamics and rising inflation is expected will lead credit growth higher in the next fiscal which may result in the further tightening of liquidity conditions, Sinha said. Bond yields will likely rise, as a result.
Tightening liquidity conditions, fiscal slippage (relatively higher reliance on borrowing), potential rupee depreciation and hardening of global yields are expected to push up G-sec yields further to levels above 8 percent for 10-year maturity.Dhananjay Sinha, Head-Institutional Research, Emkay Global Financial Services
‘Could Be The End Of Rate Easing’
With inflation expected to edge higher, the government missing its fiscal deficit target and crude oil prices rising, this could mark the end of the central bank's rate easing cycle, according to Kuntal Sur, Partner-Risk & Regulatory at PwC India.
We expect the central bank to monitor the data closely for future decisions.Kuntal Sur, Partner, Risk & Regulatory, PwC India.
RECOMMENDED FOR YOU
POPULAR